COMPANY PROMOTION.

Auckland Star, Volume LXIII, Issue 225, 22 September 1932, Page 14

COMPANY PROMOTION.

ROYAL COMMISSION URGED.

REVIEW OF ECONOMISTS.

SMALL INVESTOR'S PROTECTION.

Comment on the methods of company promotion was contained in a paper read by Professor H. Belshaw last evening before the Auckland branch of the Economic Society of Australia and New Zealand. The paper was prepared by Professor Belshaw and Mr. I* 1 . B. Stephens, of the Auckland University College, in the course of a survey of land utilisation, and the view was expressed that the operations of bond-issuing companies for land utilisation through afforestation, flax, tobacco and tung oil, constituted a social problem warranting a Royal Commission, followed by amendments to, company law. The companies, said Professor Belshaw, belonged to three main types:— (1) Private companies with no public issue, (2) public share or joint stock companies, (3) public or private companies (mainly the latter) issuing aocalled "bonds" to the public. Class (1) was of small relative and absolute importance, and appeared to be confined to afforestation. Some afforestation companies were of class (2), and in flax and tobacco cultivation they appeared to be the dominant type. There were practically no tung oil companies in this class. Small Capital. The type of company in class (3) was described by the Official Year Book as "a private company registered with a comparatively small capital, but of which the investing public do not beeome shareholders.' The company contracts with each investor that in consideration of his paying the prescribed amount of cash, it will convey to him at the end of the term a certain area of land duly planted according to a prescribed agreement. The interests of the investing public are watched over by trustees appointed by investors, and the lands concerned are conveyed by way of mortgage to the trustees until the time for conveyance to the investor arrives." However, one large concern was a public company, in which bondholders were invited to take shares.

, The' parent company normally made its profits from planting operations, but might also make them in lees xinobjectionable ways. The bondholders had no direct control over the parent company, but had some rights over the area to bo planted. Some parent companies held rights of marketing, varying considerably in detail. As regards the bonds, there was no obligation to account for the money received. In some cases, provisions regarding transfer of title to land were ambiguous. By the nature of the case, the nomination of the bondholders' trustees was in the hands of the parent company in the first instance. In some cases this nomination was perpetual. Promotion Facts. An investigation of the records at the office of the Registrar of Companies revealed a number of facts regarding promotion which gave some cause for concern. One was that brokers and landowners were prominent as company promoters, and the same individuals pr groups were prominent in various capacities in a number of different concerns. Other significant facts were a common policy by which the directors of companies unloaded assets at a greatly enhanced price on to new companies promoted by themselves, the inflation of capital and the enormous and disproportionate profits which might be made out of promotion. Frequently a director or a subsidiary held the sole I right to sell bonds or shares. In some cases the owner of the land was sole promoter. As private companies did not require to register material contracts, the original purchase price of land or other assets could be effectively concealed. There was not the slightest doubt, however, that enormous profits had been made by the sale of land from company to company, and that eventual holders had been loaded with a wholly fictitious value. As an example of the inflation of nominal capital, Professor Belshaw ■ cited a case in which a private company with a nominal capital of £350 floated a second company with a nominal capi- . tal of £250,000,' £140,000 being issued and cited in the prospectus as fully paid up, although in fact no casli had been received by the second company in respect of the shares in question. Sole Selling Agents. , As a specimen of high brokerage I charges, Professor Belshaw told how < brokers were appointed as a company''- t sole selling agents in Australia, in con- i sideration of which they underwrote ! 3000 bonds of £50 each, fn return they i were to receive, inter alia, £1000 per ' annum for the first year, commission of £12 10/ for every £50 bond sold, an '. issue of 4000 fully paid-up shares and a fee of £8 0/8 a month in respect of each of six offices which they were required to open, one in each State. They were also granted a seat on the directorate. In the same company, ao- i cording to the official records, three trustees for the holders of £5500 worth i of debentures were to receive £2500 a i year each. Even if an extra digit had > slipped in by mistake, this remuneration would still be handsome, said the speaker.

Referring to bond-holdings, Professor Belshaw stated that there was a strons inference that the holders were in the main inexperienced "small" people with one or two bonds each. Sales had been inside largely by door-to-door canvass. "The term 'bond," he remarked, "conveys to the public mind a sense of special security which is lacking in companies of the type under discussion." If the present company, finding its operations unprofitable, ceased maintenance, the bondholder*' only redress was the resumption of the arens. The appointment of trustees was not in any way an effective safeguard. They were limited to the terms of the trust deed drawn up by the parent company, and were not interested in the equity of its provisions. The maimer of their appointment was frequently such that bondholder* could have little assurance that they would act in the interests of the bondholders.

Prospectus Statements. Professor Belshaw said ho wished to make it clear that the criticism did not apply to all companies, and that where the financial methods adopted were both sound and beyond reproach, such projects for large-scale laud utilisation might provide a reasqnable, even though a speculative, avenue for investment. The authors of the paper felt that the problem was of sufficient social importance to warrant the setting up of a Royal Commission, with wide powers, which should make a thorough investigation into promotion, finance and control, with a view to making appropriate amendments in the law relating to companies.

With a view to securing fuller publicity 'for the operations of companies of the kind in question, whether public or private, it wu, suggested that the prospectus should be required to state all dealings with the land or other assets within, say, two years of incorporation, with information of, say, the three previous transfers of' the land; that prospectuses for bonds should be brought within the provisions of the Companies Act; that they should state all remuneration for promotion, brokerage or underwriting; that an annual statement be required, showing the allocation of the moneys received from each issue of bonds; that every prospectus for bonds and every bond should contain a definite statement, prominently placed, as to whether there was any security, and if so, the nature thereof; that consideration be given to the practicability of extending by legislation the powers and duties of trustees.